Jana Partners push to break up Cooper Cos. could change the stock’s outlook

Company: Cooper Companies (COO)

Business: Cooper Companies is a global medical device company. It operates in two business units: CooperVision and CooperSurgical. The CooperVision segment is in the contact lens industry, while the CooperSurgical segment is in the fertility and women’s health market through a diversified portfolio of products and services, including fertility products and services, medical devices, cryostorage (such as cord blood and cord tissue storage), and birth control. CooperVision’s products include MyDay daily disposable, MyDay daily disposable toric, MyDay Energys, MyDay multifocal, Biofinity & Biofinity XR, Biofinity Energys. CooperSurgical’s portfolio includes INSORB, Lone Star, and Doppler Blood Flow Monitor. It also offers disposable wireless surgical retractors with an integrated multiple light-emitting diode (LED) light source and dual smoke evacuation channels, and disposable surgical suction devices with an integrated, wireless radial LED light source.

Stock Market Value: $14.41 billion ($72.49 per share)

Activist: Jana Partners

Ownership: no

Average Cost: no

Activist Comment: Jana is a very experienced activist investor founded by Barry Rosenstein in 2001. They have made a name for themselves with well-thought-out plans for long-term value and deeply researched activist positions. Rosenstein called his activist strategy the “V cube.” The three “Vs” were: (i) Value: buying at the right price; (ii) Votes: knowing whether you have the right to vote before starting a proxy fight; and (iii) Multiple ways to win: having multiple strategies to increase value and exit an investment. Since 2008, they have gradually shifted this strategy to what we define as the three “S”: (i) Stock price – buying at the right price; (ii) Strategic activism – sale of the company or spin-off of a business; and (iii) Star advisors/candidates – collaborating with senior industry executives to advise them and sit on the board if necessary.

what’s going on

On October 20, Jana announced that they had taken a position in Cooper Cos. and planned to press on strategic alternatives, including a potential transaction to merge its contact lens unit with its peers. Bausch + Lomb.

behind the scenes

Cooper Cos. is a leading global medical device company operating in two segments: CooperVision and CooperSurgical. CooperVision (66% of revenue) is focused on selling contact lenses. CooperVision is the global leader in contact lens wearers and ranks second in terms of market share (26%), competing with rivals johnson and johnson (37%), Alcon (26%) and Bausch + Lomb (10%).

The global soft contact lens market is estimated to be worth approximately $11 billion and is growing at an annual rate of 4% to 6%. The segment has numerous headwinds, including a steady shift to silicone hydrogel 1-day lenses (about 40% of consumers still use non-daily lenses), global growth in contact users, and high barriers to entry for competitors. So this is a great business generating EBITDA margins in the mid-30s.

CooperSurgical (33% of revenue) is focused on women’s health care; 60% of fiscal 2024 revenue was from office and surgery (Paragard IUDs, stem cell cryostorage, medical devices) and 40% was from fertility (IVF supplies, equipment, genomics and donor services). Fertility treatment is a $2 billion global market and is expected to grow at a rate of 4% to 6% annually.

Cooper was a pure vision business for most of its history until they added CooperSurgical in the ’90s. Originally this was a small (probably for tax purposes) add-on. However, the company started investing heavily in this segment in 2017 and has spent over $3 billion on it since then.

The problem with this shift is pretty clear: Cooper is effectively taking money out of a really good contact lens business and then reinvesting it in a business that most people would find less attractive. This is evident in the company’s declining return on capital; Despite these massive investments, CooperSurgical is currently operating at lower margins than in 2017.

The main factor behind this operational change may be management changes. Company CEO Albert White, who previously led CooperSurgical, assumed leadership shortly after this expansion began. This raises a larger question about the company’s strategic focus, leading many to question why this company’s leader lacks expertise in its core business.

These strategic missteps were exacerbated by short-term headwinds in both segments, some self-inflicted. According to CooperVision, the company mismanaged market expectations for the launch of its new daily lens product, MyDay Energys, which is now behind schedule.

IVF, a top-quality business for CooperSurgical, has slowed meaningfully; This is likely attributable to President Donald Trump’s comments suggesting possible reimbursements for IVF costs, causing patients to delay treatment in anticipation of this potential coverage. As a result, organic growth in revenue fell significantly below expectations to 2% from 7% in the previous quarter, forcing Cooper to significantly lower its full-year guidance in its third-quarter earnings release and causing the company’s share price to fall 12.85% the next day. Currently, Cooper trades with a 12-month forward P/E ratio of 16.4x; This is a significant discount from the 10-year average of 23.1x.

All of this has led Jana Partners to announce a senior portfolio position in Cooper and plans to push for strategic alternatives, including a potential transaction to merge its contact lens unit with peers such as Bausch + Lomb. While a transaction of this nature usually raises some antitrust concerns, the opposite may be the case here.

First, the merger would not result in a market leader because its 36% total market share would be just below market leader J&J’s 37% share and not far ahead of Alcon’s 26% share.

Second, these businesses are highly complementary, with minimal geographic and product overlap, indicating a reduced likelihood of regulatory hurdles. Bausch + Lomb has not been shy about potential interest, nor does it see any regulatory issues, as CEO Brent Saunders has publicly stated that a potential merger with Cooper would “strengthen competition and create a company with more scale in the contact lens segment.”

But Bausch + Lomb isn’t the only potential buyer. Companies such as European glasses manufacturer EssilorLuxottica could be interesting and have even less regulatory uncertainty.

As for CooperSurgical, there will certainly be private equity interest, as evidenced by: Karataş And KPI peer nearing deal to acquire hological. However, Cooper shareholders could derive more value from the company internally cleaning up this portfolio by focusing on its higher-multiplex IVF business, shedding some non-core assets and potentially bringing on new operators to realize a strong return.

Overall, while short-term headwinds are likely to ease, Cooper has multiple ways to recoup its discount and open up for a potential rerating. Jana’s thesis is simple: It makes no sense for these two businesses to be under the same roof, and a strategic combination for the vision business could generate between $300 million and $500 million in synergies; That’s a lot for a business with $850 million in EBITDA. But step one of their plan is to convince management that separating the two businesses is the right strategic move; and despite growing public interest, there is no guarantee that management, especially those with such a business background, will accept it.

If management resists, this campaign changes dramatically from a strategic thesis to a leadership/governance thesis; It likely focuses on the appointment of a new CEO with a deep background in the contact lens industry, refocusing the company on its core while also positioning it for further distinction.

Jana isn’t calling for an outside management change, and White might even be the best person to run an independent CooperSurgical business. But activism is about the power of argument, and Jana seems to make a compelling argument here. We hope all participants will make management see the situation this way.

Ken Squire is the founder and president of 13D Monitor, a corporate research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, an investment fund that invests in a portfolio of activist investments.